World Markets; France's Buying Binge Takes Its Toll

By Jonathan Fuerbringer

Published: July 22, 1990

STATE-CONTROLLED French companies are breaking the mold. Rather than tending to their home market, they are aggressively buying abroad, both in Europe and the United States. Some, like Renault, are positioning themselves for the economic union of Europe in 1992; others, like Rhone-Poulenc, are pursuing the grander goal of a top ranking in their industry, worldwide.

But the buying spree is taking its toll. Shares of some of the companies, which are partially publically owned, are lagging far behind what is in any case a mediocre performance by the Paris Bourse.

Some analysts suggest it is risky for investors to buy the stocks because the state-controlled firms show little concern for their public shareholders. ''A lot of these companies are not being run for the shareholders,'' said one analayst in a French firm, speaking only with assurances of anonymity. ''They are being run to secure a strategic position for France. So it is quite dangerous for shareholders to be in companies like this.''

In addition, the British, who have the most open market in Europe, are getting annoyed as more and more of their companies are picked off by France's state-controlled ones.

And the European Commission, whose competition commissioner, Sir Leon Brittan, is working on proposals to curb unfair competition by state-controlled companies after 1992, might also take notice - especially of companies dramatically underperforming the market.

More than 80 deals have been completed during the French buying spree in the last year and a half, according to data gathered by Translink's European Deal Review and by the accounting firm KPMG Peat Marwick. The total value of the deals, where prices were reported, is around $6 billion.

More important, the French, according to Mark Dixon of Translink, have outgunned state-controlled companies in other countries. Last year, purchases by state-controlled companies equaled 28 percent of total French acquisitions - no other country's state companies reached 5 percent.

Among the deals: Rhone-Poulenc, a chemical and pharmaceutical company, bought the Rorer Group, the American drug company, and RTZ Chemicals, the British speciality chemicals firm. Thomson CSF, the defense contractor, bought Ferranti Thomson Sonar Systems in Britain. Renault joined in a cross-ownership deal with Sweden's Volvo. And Pechiney International, which bought American National Can in 1988, purchased Celegraf in Spain, a food packaging company.

In the last 12 months, Rhone-Poulenc has underperformed the French market, as measured by the CAC general index, by 25 percent; Thomson CSF, by 57 percent; and Pechiney International, by 36 percent. (Renault does not have a significant amount of stock trading.) Rhone-Poulenc's performance is most directly attributable to it aggressive acquistions, although it was also hurt by the economic freeze in Brazil and the weak dollar, which reduces foreign earnings. ''It's been overly aggressive acquisitions, purely,'' said Michael Diehl, an analyst at Kleinwort Benson Securities in London. ''It's been a little bit of disregard for the shareholders and the market doesn't appreciate it.''

But while the short-term prospects of Rhone-Poulenc and the others might not be that good, some analysts feel that the buying spree has better positioned them for the long run.

Pascal Viornery, managing director of Bertrand Michel Securities Inc. in New York, argues that Pechiney, for example, has successfully made itself over from an aluminum company to a packaging firm and the market has yet to catch on.

On the issue of unfair competition, some analysts agree that aggressive acquisitions have been made easier by having less concern for the stock price and shareholders. But they also argue that these companies are still hampered in raising money by the limit on public stock ownership, which is 25 percent of capital.

But since the European Commission, at the least, is likely to look at the issue, the French state-controlled companies will have the reason to acquire as fast as possible before some new, and possibly restrictive, guidelines are in place.